American Higher Education Is One Of The Greatest Bubbles Of Our Time

I do not believe many Americans would claim that secondary education in this country today stands as the best in the world. Indeed, most seem to agree that American primary and secondary education today is pretty hopeless. But those same people will insist, in the same paragraph, that American tertiary education is unequaled.

Maybe at one time that was true.

American universities used to be places where excellent teachers could be found, where the best of them rose to the top. But then along came tenure. It is the brass ring on the academic merry-go-round, and excellence in teaching has never been the way to attain it. Publishing and research and campus politics are what lead one to tenure. In pursuit of it, as often as not, teaching is seen as a distraction. I remember a professor once telling me, "This is a fantastic life. Too bad we have all these students around."

Tenure, at its worst, is where incompetent teachers find refuge. American academia is controlled by tenured faculty. They do research; they go to the library. Most will not say it, but students coming around, whether in need of extra help, complaining about their grades, or submitting papers that have to be graded, are an impediment to what they see as the real work of a college professor.

There is no profession in the world, anywhere in the world, where if you work for seven years you get a lifetime guarantee of a job. Except at a university. Becoming a doctor, becoming a partner in a law firm, you still have to produce. If you have tenure at a university, by the time you are thirty-five you never have to prove yourself again. Unless you burn down the university or murder somebody, you have a job for life. And a job as a college professor is the closest thing this side of political patronage or a mob-run construction site to a no-show job. When I was a full professor, I figured out that, averaged over a calendar year, I could fulfill my obligation by working five hours a week.

Academic tenure is a relatively recent development in American education. And the rationale behind it, academic freedom, seems a little bit ludicrous today. Does an accounting professor have to have life tenure to protect his or her political views in the classroom? A physics professor? Political beliefs about assets and liabilities? About the force of gravity on falling bodies? The professors may need protection from one another, but that is no justification for lifetime employment.

Tenure is an aspect of the exceptionalism that makes American tertiary education one of the greatest bubbles of our time. Right now, to go to Princeton costs $56,000 a year. That is just to get in the door: tuition and room and board. It does not include the plane fare to get there. It does not include beer. That is at least a quarter of a million dollars for a four-year course of study, and the price goes up every year. Soon it will be fifty times what it cost me to go to Yale in 1964. All the Ivy League schools, as well as Stanford and the like, have convinced everybody that admission is worth the price of the exorbitant tuition, and so far the world has fallen for the pitch, just like everybody else fell for the housing bubble. There are always "good" reasons and "solid" evidence for participating in whatever the current bubble is. In three or four years, just the base cost at Princeton will be $65,000 a year.

I went to a couple of these schools, Yale and Oxford. I loved every minute of it. I had a fabulous time. It made me who I am. But if it is just an education you want, you can get a good education, if you apply yourself, at any number of places, and everyone knows this by now. What these institutions are selling today is nothing more than the sticker--the brand name, the label. And when things get tough, fewer and fewer people are going to be able to afford to pay so much for so little.

If Princeton wanted to position itself as an Asian university, yes, it could fill its classes with plenty of smart overseas students who can afford to pay their own way. Oxford, right now, could fill every class with qualified Chinese students, all of whose families would willingly, and quite easily, lay out the full fare. But an American kid who has to take out a loan to attend one of these schools faces coming out of college a couple hundred thousand dollars in debt, and that is hardly the great future these places promise solely on the strength of their names. Loans for education can be written off under US bankruptcy laws. In America, if you go broke, you can write off just about everything -- everything but the loans you received for your education, the very debt that probably launched you on the trajectory to bankruptcy in the first place.

If the West continues to have problems, as seems likely to be the case, it is going to be extremely difficult for these places to find applicants. As expenses keep rising and institutions keep raising their prices, an increasing number of Americans will be unable to afford the tuition, while overseas students are discovering better brand names closer to home. If you look at the university rankings that have been published over the past twenty years, you will see now, for the first time, many Asian universities that were never there before: great pedigrees, great educations. There is competition coming.

And then there is technology, which to kids today is second nature. Why get up at 8:00 a.m. to drag yourself to Spanish class three days a week when you can learn more efficiently and on your own schedule via computer? Does America need thirty thousand expensive, tenured Spanish professors? Is the Spanish professor at Princeton going to teach you Spanish better than anybody else? You can learn Spanish a lot faster, probably better, and certainly for a lot less money, by going online. Likewise with accounting, physics, and calculus. What you need is a great teacher. Why not find one very talented professor, tenured or not, and let him teach the course over the web? Why not find two or three great teachers whom everybody can learn from, giving millions of students access to the best instruction available?

Justin Sullivan/Getty ImagesA woman works on a laptop on the Stanford University campus.

For some institutions of higher learning, it may already be too late. Several elite universities in the United States are now on the verge of bankruptcy. Their expense structure is unsustainable. You cannot run a business of any kind where your top people work only five hours a week, or work even ten hours a week. Do it and you are going to go bankrupt, especially operating within the constraints of a system like tenure, where it is not possible to fire anyone, not even those who, by virtue of the system, do not work very hard in the first place. Add to that the fact that Ivy League universities are traditionally overgenerous with labor, because they do not want to appear to be filthy capitalists, and bankruptcy presents itself as a blessing. We saw it with the automobile industry. The unions would come around when the contracts were up, and the auto companies would cave in. They just kept giving away the store. Eventually it bankrupted the industry.

Part of the problem is that these institutions are run by academics; they are not run by entrepreneurs. The universities are badly managed, and their endowments can no longer save them. Much of what makes up their endowments is phony. A lot of what these schools have invested in over the past twenty years has been things that are illiquid, assets for which there is no public market, whether timber or real estate or the main one, and most crippling: private equity.

In the bubble, many financial institutions carried what are known as Tier 3 assets. These are assets whose value was no more than hypothetical--mortgages, for example. Their market value was "marked to a model." If your computer program said a particular piece of paper was worth 96, you wrote down 96. Moody's and Standard & Poor's said the paper was AAA and therefore worth 96. But we know now that most of that stuff was garbage. And it is that kind of stuff that makes up a very large share of the endowments in question.

Harvard - and this applies to all the elite schools - does not manage a lot of this money itself. A hotshot private equity guy comes in and says invest in our fund, and Harvard gives him $100 million. He goes out and invests in new ventures or buys companies; whatever he does, he marks it to model and Harvard accepts his numbers. Now the fund manager has every incentive to jack up his valuations, just as Fannie Mae and Citibank did, and just as everybody else who was using mark-to-model did. And Harvard loves to accept the numbers with pride.

All of them, in the bull market, thought they were making huge amounts of money. They spent. They gave everybody raises. Harvard went out and bought huge amounts of acreage in Boston. Yale bought a lot of acreage. They thought: We have all this money; it is time to expand; we can be generous. Then they all got hit with the truth - the financial meltdown - and what some of them did was start borrowing. They started selling bonds to the public, based on their respectable names and their AAA credit, and the market bought into it.

Several universities, for the first time in their histories, now have debt on their balance sheets. They have bonds they have to pay off. At the same time, many of the portfolio managers have leveraged the portfolios. They have bought things on margin. It is a classic case of how companies and institutions get into trouble. They borrow things, being told that there is no problem. Things go bad, then things get worse, and they realize that this is a permanent state, that they have a serious problem. It is especially a problem in academia because they cannot cut their expenses. They have unions, tenured professors.

Then there are the many off-the-balance-sheet obligations. One of the more absurd requires the school to pay for the college education of the children of any parent - not just a professor - who has been employed by the university for ten years. An employee with three or four children represents over $1 million of future obligations. Also, private equity deals may require an ongoing stream of funding that does not appear on the balance sheet--fine when things are going well, but troublesome when things are not and administrators need more money. Every school has millions of hidden obligations like these.

Some of the people running these university financial departments are not terribly clever. The same is true of many pension plans. Many state and city pension plans are bankrupt. In the next bear market, whenever it comes (and it will probably hit pretty soon), you are going to see more of the same. It will come as a huge shock to the world when Harvard University or Princeton or Stanford goes bankrupt, when these institutions that have been around for decades, for centuries in some cases, understand how bad their finances are.

AP Photo/Lisa PooleCould Harvard go bankrupt?

When the big collapse came in 2008 and 2009, a lot of them were faced with having to cut back their spending. The way they traditionally operate is they take a percentage of the endowment, say 5 percent of the endowment, for running the place. But the endowment of $40 million is suddenly $24 million - as a result of the crash - and they start looking for places to make cuts. But they have already increased their expense minimums; they have taken permanent debt on their balance sheets, putting themselves in deeper trouble, and what they do then is add more debt, because they think the market will turn around. We have smart managers, they tell themselves, who assure us everything is going to be OK.

We have seen it many times. Things start spiraling downward, and by the time people start catching on, it is usually too late, as it was for Lehman Brothers and Bear Stearns. One of the advantages of this, of course, is we might get rid of tenure finally. And the Asian universities, which do not have these problems yet - gigantic salaries, gigantic union obligations - will rise.

One of the more vital aspects of an American university education will survive even after the current bubble pops: the experience of going away from home to live and learn among hundreds or thousands of other eighteen- to twenty-year-olds. Sports teams, debating societies, social events - all will continue, even if much of academic life is conducted via a computer in a dorm room. Lecture halls might even survive, with lectures being piped in via satellite. Libraries will disappear or be converted to tennis courts.

The "creative destruction" caused by technology combined with an absurd, unsustainable cost structure will give rise to whole new centers and ways of learning - just as has happened throughout history. We have all forgotten the names of the former great world universities in places like Morocco, Timbuktu, Portugal, Italy, Asia ... the list goes on.